U.S. Steel Falls As Recovery In Energy Sector Falters

Shares of U.S. Steel (X) closed lower, along with the price of crude oil. With U.S. Steel’s prospects so closely tied to crude prices, shares of the steel maker fell with the drop in crude, after stockpiles dropped less than expected in the latest week. U.S. oil prices almost 4% percent Wednesday with an intraday low of $50.28 per barrel.

JOINED AT THE HIP WITH CRUDE: The rate of oil and gas production in the U.S.is closely aligned with U.S. Steel’s Tubular Products sales. The Tubular Products unit produces and sells seamless and electric resistance welded steel casing and tubing known in the industry as, oil country tubular goods or OCTG. the company also provides OCTG rig site services.

TUBULAR OUTLOOK: With its Q4 earnings report back in January, the company said it sees results for its Flat-Rolled, European, and Tubular segments to be higher than 2016. On its Q4 earnings call, the CEO of U.S Steel commented on the segment: “I would start by saying, we believe we hit bottom for sure in that particular segment. What has been inspiring I would say, is the fact that if you go back to May, we were running about half the number of rigs that we’re running right now. The tendency should be to continue to increase. From that perspective, we’re going to be utilizing our assets much better.” Following its Q4 results, BofA/Merrill upgraded U.S. Steel to Buy from Neutral. Analyst Timna Tanners raised her 2017 EBITDA estimate to $1.3B from $1.1B, versus consensus of $1.2B, at the time, to reflect improving Tubular ops results from rising U.S. rig count and rising oil country tubular good prices. The analyst said a recovery in Tubular is not incorporated in management guidance and cost pressures are now known, providing an attractive buying opportunity in U.S. Steel shares.

FADING TRUMP TRADE: Recently shares of U.S steel, along with other steel-makers, lost their post-election mojo after President Trump’s efforts to amend current health care legislation failed. Also contributing to the the slide in U.S Steel’s stock price was the new presidents recent budget proposals hinted at cuts to the Department of Transportation’s spending and Amtrak subsidy plans in addition to sluggish demand from China. On March 29, Cowen analyst Novid Rassouli sand the sentiment in steel stocks has deteriorated following the drop in oil prices, the non-repeal of ACA, and tightening Chinese credit. Rassouli said U.S. HRC prices may come under near-term pressure due to widening domestic versus international spreads and failing scrap prices, leading to additional downside in steel names. The analyst said U.S. Steel and AK Steel (AKS) are the most levered to HRC prices, ArcelorMittal (MT) could see additional downside if iron ore prices continue lower, and views Steel Dynamics (STLD) and Nucor (NUE) as defensive plays given lower fixed cost structures.